CPF rethink needs to address structural retirement inadequacy

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Singapore's Central Provident Fund (CPF) system must go beyond tweaks to the withdrawal age and minimum sum, to address the structural problem of retirement inadequacy and returns on CPF funds, said participants of The Business Times' Pre-Budget Roundtable 2015.

"Parametric reform, things like changing how much you can withdraw at 65, changing the minimum sum . . . is actually just window dressing, to make people change their opinion about whether they like the CPF or not," said Walter Theseira, a Nanyang Technological University assistant economics professor with an interest in pension reforms.

A panel tasked by the government to review the CPF system is due to submit its official recommendations this week. It has indicated that it will recommend that CPF members be allowed to withdraw a lump sum of about 20 per cent of their retirement savings at age 65, and top up their CPF savings beyond the Minimum Sum for higher retirement payouts.

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But both Prof Theseira and fellow roundtable participant Laurence Lien, chairman of the Lien Foundation, think that a broader conversation about the underlying issue of retirement inadequacy should take place soon.

"The deeper structural problem is that we have quite a large group of Singaporeans who cannot afford to retire based on their savings alone," said Prof Theseira. He believes the only way to fix the problem could be to subsidise the retirement of those Singaporeans using state funds, and that such a solution needs debate.

"We've been introducing more help - the Pioneer Generation Package, things like that which fill in some of the gaps. But maybe we ought to have some sort of discussion about whether we should be directly supporting people with a guarantee," he said.

Mr Lien agreed that retirement inadequacy is a pressing issue which requires a "fundamental restructuring" of the CPF system. He noted that this is linked to how Singaporeans are able to "consume property through the CPF". CPF members are allowed to withdraw all Ordinary Account (OA) savings and use monthly CPF contributions to the OA to buy properties or pay off housing loans - subject to certain limits.

When wealth is tied up in property, it can be hard to persuade people to monetise assets for retirement purposes too, Prof Theseira said. This is a problem as it leads to people asking for handouts when they do not need them.

He raised an oft-cited example of retirees living in landed property - bought in the 70s when such property was affordable for middle-income earners - who do not have enough in their bank accounts and hence ask for government support. "It's understandable that they don't want to sell, so dealing with that sort of issue is very tricky. We may have to get more creative, giving them financial aid but then taking a lien on the house," Prof Theseira said.

To ensure that CPF members have adequate retirement savings, the roundtable participants suggested raising CPF contributions or improving the returns on CPF savings.

DBS economist Irvin Seah said that there is room for more flexibility, not just in withdrawals, but also contributions, including to family members' accounts. "More flexibility in terms of voluntary contributions is both helpful and prudent in the long term."

Last week, Manpower Minister Tan Chuan-Jin said that the government was "studying when to take the next step increase in CPF contribution rates for older workers" above 50. CPF contribution rates for these workers were lowered in the past to make them more employable, but have been restored in phases since 2012.

Mr Seah also believes there is room for returns on CPF funds to be revised upwards. Ordinary Account savings earn a floor interest rate of 2.5 per cent, while Special Account and Medisave Account savings earn a floor interest rate of 4 per cent.

Mr Lien too, thinks that "returns are too low because the government is making more on the GIC side".

CPF funds are used to buy Special Singapore Government Securities (SSGS) issued and guaranteed by the government. The SSGS proceeds, deposited with the Monetary Authority of Singapore, are converted into foreign assets which are managed by GIC over the long term, along with other government funds. Part of GIC's investment returns then flow back to the CPF as SSGS coupon payments.

"Yes, there is volatility and yes, the CPF rate is a risk-free return. But the government is not in the business of making money from the people. So, if it's been accumulating savings, give bonus returns . . . excess returns. There is no need to lock it in at a higher percentage rate," said Mr Lien.